Bubble watchers set to eye Canadian housing data

Posted on April 25, 2012 by Dale McGauran

Bank of Canada policy makers are weighing whether to raise interest rates over the next few months, so you can bet they’ll be looking to any drop of news from the housing market to help guide their decisions.

Although it’s a bit long in the tooth, the Teranet-National Bank Composite House Price Index for February comes out Wednesday, offering a gauge of how much more or less it costs to buy an existing single-family home. The index is rather limited on the whole, in that it does not provide actual prices, and it only tracks the rate of change in prices on properties where homes have been sold at least twice.

Still, some economists consider it a decent snapshot of what’s going on in major markets, and how significant each is in shaping the national trend.

The key for the February version will be whether it shows home resale prices continued to edge up on a monthly basis, or whether Vancouver is faltering enough to pull the national market down, despite Toronto’s strength. The last report showed prices rose just 0.1 per cent in January from December, although they were up 6.5 per cent from the previous year. Vancouver resale prices fell 0.3 per cent, the fourth monthly drop, but this was offset by a 0.6-per cent gain in Toronto.

The tug of war between Toronto and Vancouver, which together account for more than 25 per cent of the national market, is being watched closely.

Mark Carney, the Bank of Canada governor, continues to fret about high household debt. He also has warned that home prices in some cities are “extremely firm,” and that there are “issues” in some segments of the market. While he wasn’t more specific, Mr. Carney surely meant the Toronto condo market, now the epicentre for fears about a jarring correction, just as Vancouver was playing that role a year ago when he travelled to the Western city to warn in a speech about “extreme” pricing fuelled by foreign speculators.

According to data released last week by the Canadian Real Estate Association, the average cost of a Vancouver home is still more than $761,000, higher than anywhere else in the country. However, it was 3.1-per-cent lower in March than in the same month last year, and sales activity is also slowing. Meanwhile, Toronto is still gaining momentum, fuelling more talk of a bubble, with average prices in the country's largest city soaring more than 10 per cent last month, to about $504,000.

The opposing directions of the two cities have resulted in a slightly lower country-wide average price, easing concerns about a U.S.-style crash. How this yin-and-yang plays out over the coming months will do much to determine whether Mr. Carney (or regulatory authorities) step in to try and engineer a “soft landing” for the housing market. Mr. Carney warned again last week that the use of home-equity lines of credit exploded over the past decade as prices rose, suggesting that if prices were to drop sharply, millions of families would almost overnight lose the confidence -- and capacity -- to keep spending.

Even as rising rates would likely mean lower home prices, the hope among economists pushing for hikes is that a small rate increase or two over the next six or eight months would cool the market without crippling it, and would nudge borrowers to rein in their spending, but slowly and gradually enough that the domestic demand driving growth doesn’t fall off a cliff.

Already this week, there have been reminders of how elusive that sweet spot may prove to be. On Tuesday, the Conference Board of Canada said consumer confidence is plunging this month, as families worry about their job prospects and their financial well-being. Plus, after a Tuesday's disappointing retail sales report for February, many economists said Mr. Carney’s estimate of a 2.5-per cent annual growth rate in the first quarter may be too optimistic. And then there’s Europe...

OTTAWA— Globe and Mail Blog

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